Government debt issuance to triple to $62b as Indonesia fights COVID-19

Indonesia’s new debt is likely to triple this year as the federal government struggles to fund its fight the COVID-19 pandemic.

Based on the newly enacted Presidential Regulation (Perpres) No. 54/2020 on the 2020 state budget revision issued on April 3, the federal government has increased deficit spending to Rp 1 quadrillion (US$61.5 billion) this year, a jump of 286 percent from the original target of Rp 351.9 billion.

The government plans to provide sovereign debt papers worth Rp 549.6 trillion, a rise from the initial Rp 389.3 trillion, while also likely to raise Rp 450 trillion in “pandemic bonds”, given that demand for government bonds has considerably declined.

Finance Minister Sri Mulyani Indrawati said on Monday that the federal government would search for safe financing sources, like the option to use the endowment fund for education (LPDP) together with accumulated cash surplus (SAL), but said that “wouldn't normally be enough”.

“Therefore, we must issue government debt papers to consider the very best financing sources. We will be extra careful in navigating these uncharted waters,” she told House of Representatives Commission XI, which oversees financial affairs, on Monday.

President Joko “Jokowi” Widodo has announced additional state spending worth Rp 405.1 trillion to finance Indonesia’s battle against the novel coronavirus pandemic. The brand new allocation will be utilized especially for healthcare, social back-up and business recovery programs.

The state budget revision now targets Rp 1.76 quadrillion in revenue, lower than the Rp 2.23 quadrillion previously lay out in the 2020 budget. Expenditure, meanwhile, jumps to Rp 2.61 quadrillion from the Rp 2.54 quadrillion targeted previously. The government has widened its state budget deficit beyond the prior 3-percent-of-GDP cap to around 5 percent this season, in line with a fresh government regulation in lieu of law (Perppu) to lift the legal limit.

On Thursday, Indonesia raised $4.3 billion, including from the longest-dated US dollar bond ever issued by an Asian nation with a 50-year tenure, to aid government funding. The offer was finalized in america on Monday and sold in maturities of 10.5 years and 30.5 years, worth $1.65 billion each, with a 50-year tranche worth $1 billion, Reuters reported.

“Chances are that, during this time period, the ownership structure of government securities changes somewhat with foreign investors’ lowering their holdings considerably and BI [Bank Indonesia] seen to expand its balance sheet,” according to a research note by Fitch Solutions’ country risk and industry research team on Tuesday.

Perppu No. 1/2020, issued last week, allows the central bank to buy government bonds at auction to anticipate a situation where the market is unable to fulfil the government’s financing target. The regulation revokes a 1999 law on the central bank, which only allowed BI to get government bonds in the secondary market.

Demand for Indonesian debt papers declined sharply in March, according to official documents. At a Feb. 18 auction, the federal government saw Rp 127 trillion in bids and absorbed Rp 19 trillion, while on March 31, it only saw Rp 34 trillion in bids and absorbed Rp 22 trillion.

Foreign investors have dumped Rp 148.76 trillion in Indonesian assets, including Rp 135.08 trillion in government bonds and Rp 9.71 trillion in Indonesian shares, BI data show.

Fitch Solutions was of the view that, if the rupiah continued to depreciate rapidly as BI extends its government bond holdings, the Indonesian economy could enter a sovereign debt crisis, as the central bank bled foreign reserves.

“For now, this is simply not our core view, as we expect the recovery off the trunk of the COVID-19 outbreak to be robust,” Fitch wrote. “Moreover, Finance Minister Sri Mulyani includes a good track record of fiscal discipline, in fact it is likely that, once the worst is over, she will ramp up efforts to bring government spending back line and broaden the earnings base.”

Fitch Solutions now expects the country’s public debt to average 45.3 percent of GDP over 2020-2023 versus 33.1 percent within the last five years.